NYSE Rule 342 (b)
general partners or directors of a member firm must select someone (among themselves) to have resopnsibility of internal supervision and control of the firm and compliance with securities laws; must (1) delegate authority and responsibilities to qualified
NYSE Rule 344
Research Analyst is defined as a member, allied member, or employee of a member firm whose name appears on a reserach report and who is responsible for the preparation of the substance of the report
Under the rule both research analysts and supervisory an
Rule 472
Communications are advertisments, market letters, research reports, sales literature, electronic messages, contact with media, and any memoranda show to public. All must be approved in advance of use by an SA or designated supervisor
For how long must communications with the public be maintained?
Three years. Retained documents must include names of persons preparing the communications and the names of the persons approving the communications. Must be ready for NYSE to review when needed.
Advertisements
communications that reach mass audience through public media (ie newspapers, radio, television, billboards, and signs)
firm's name must be indicated wtih any advertisements with the exception of recruiting ads
Sales literature
information promoting products, services or facilities or a communication that calls attention to research reports, brochures or similar materials
must recieve approval before disbursement
Research Reports
written or electronic communications that include an analyis of equity securities of individual companies or industries sufficient upon which to base an investment decision
SA may approve his own research report
market letter
a condensed version of a researach report, summarizing prior omments or reiterating opinion of the brokerage firm
must offer to provide supporting information
SA approval is required if sent to 25 or more prospective clients within a 30-day period or sent
Recommendations
any statement intended to influence a customer to purchase, sell, or hold a security
- when recommending a purchase current price must be indicated
Opinions
when a firm makes an opinion it must labeled as such
Can I firm comment on unsubstantiated information?
Yes, if the source of the information and the fact that it is unsubstantiated is disclosed
When is language inappropriate?
if it is promissory, flamboyant/inflammatory, exaggerated, or in poor taste
Information supportin a recommendation...
must be provided or offered upon request. The offer for additional informatino must be prominently displayed in at least teh same type as the body of the material, or in smaller type of a different color.
Disclosure of conflict of interest
If a communication recommends the purchase or sale of a specific security, the report must indicate if it
1) makes a market in the security
2) trades the security (deals) as a principal
3) acted as manager or comanger on the most recent public offering of
Reference to past performance
Can be made provdied references are
1) balanced
2) confined to a specific universe
3) cover at least the previous 12 months
Reference to past recommendations must...
1) indicate the date and price of the initial reccomendation
2) the date and price at the end of the period or when liquidation of the position was recommended
Allowed to present a summarized or average record that contains total number of items recommend
Improper references to past performance
NYSE feels it is improper to mention the fact that the security was recommended at a lower price
allowed to say "the security is fully priced and profits may be taken
Independent Third Party Research
prepared by a person or firm unaffiliated with the broker-dealer that is making the reports available
- no need for approval
- disclosures based on the firm preparing the report, not the firm distributing it
Thir-party research
prepared by an affiliate of the borker deal at the request of a broker-dealer that maintains editorial influence over report content
- Must be approved by an SA
What disclosures must third party research include?
1) Whether the broker-dealer has received compensation from the subject company within the precedin 12 months, or expects to receive compensation in the upcoming three months for investment banking services related to the subject coompany
2) whether the b
What are the rules for dating literature?
Literature must be dated
- references to specific securities must be dated by day, month and yeaer
- industry study or economic overview may be dated by month or season
- General literature may be dated by year
What are the rules around references to investment yield?
Following disclosures:
1) all fees, expenses, and charges that may affect yiield calculation
2) whether the yield is actual or projected
3) the basis of the yield
4) expected conditions that are likely to change or affect the yield, such as an early call
What must testimonials include?
1) the results obtained by the investor are not indicative of results achieved by other investors
2) results are not indicative of future performance
3) a fee (other than a nominal sum) was paid
4) if an expert opinion is offered, the person making the te
Chinese wall
must be reinforced through supervision and a member's written supervisory procedures
exception: when it is necessary to consult Ibanking and non-research personnel to review information
- in this case communications have to be routed through legal or comp
When can a subject company be notified of a rating change?
after the close of trading one business day before the public announcement
Three-way communications
Research personnell are prohibited from from communications with customers regarding an investment banking transaction in the presence of investment banking personnel or personnel of the issuing company
Ratings disclosures
1) the percentage of all securities the firm has rated in each categor (Buy, Hold, Sell)
2) the percentage of subject companies within each rating category that are investment banking clients of the firm, or have been within the past 12 months
3) must inc
Rule 472
Quiet Periods:
40 days for IPOs
10 days for secondaries
25 days for participating broker dealer that is not manager or co-manager in an IPO
Booster Shot
reports published shortly before or after the end of a lock-up agreement (restricted selling period for insiders).
prohibited from being publsihed by a manager or comanager of offering for 15 days prior to and after the expiration of lock-up agreements
Termination of Coverage
must notify a customers in an equivalent manner to which research reports are normally distributed on teh subject company
Final report must include a recommendation unless it's impractical - if impractical a rational explanation of why must be given
Public Appearance
conference call, seminar, or public speaking engagement delivered to 15 or more persons or one or more representatives of the media in which an analyst makes a recommendation or offers an opinion concerning a security
includes the writing of a print artic
What disclosures are required during a public appearance?
1) whether the subject company is a client of the member and the types of services provided by the member
2) whether the analyst (or member of the analyst's household) has a financial interest in the security that is the subject of the report and the natu
When are analyst prohibite from trading a security currently under coverage?
30 days prior to and 5 days following publication of a report on the subject company
What are restrictions on IPO purchases for analysts?
Analysts cannot buy pre-IPO shares of a company in the same sector the analyst covers
Exceptions:
-1) where the analyst is a passive investor
2) where the analyst is not making trading decisions on the securities
3) registered companies as defined under t
Blind Trust Exception
In the event an analyst or his family member owns an investment account that is managed by another person who makes all investment decisions the account is exempt from trading restrictions normally place on an analyst
Rule 791
Applies to options.
Advertisments, educational material, and sales literature must be approved by the Compliance Registered Options Principle
Copies must be retained for 3 years and must include the name of the preparer.
Advertisments and educational mate
FINRA Rule 2120
analysts cannot persuade customers to trade securities by manipulative or deceptive means or schemes
Control Relationships
Applies when making an agreement with a customer to buy or sell the security of an issuer that controls the member firm
Disclosure may be made in writing at or prior to the completion of the transaction
Sales Literature (FINRA Definition)
market letters (if sent to 25 or more prospective or existing customers and a recommendation is made)
notices
circulars
research reports
form letters
reprints of published articles
Advertisements (FINRA)
any published material or material used in electronic or public media - does not include independetly prepared reprints and institutional sales material
For how long must a firm maintain a file containing all advertisments, sales literature, and independently prepared reprints?
for three years after the last date of use (two years in a readily accesbile location)
What must be kept in addition to the advertisements, sales literature, and independently prepared reprints?
A file that contains all source material for any chart, table, graph or other illustrations used in communications
Initial Advertisements
If a member firm has not filed advertisements with FINRA or a securities exchange in the past it must file it's advertisement 10 business days prior to use. A firm that falls in this category must continue to file advertisemnts 10 business days prior to u
What types of advertisements must be filed 10 business days prior to use?
1 ) Advertisements for CMOs
2) Advertisements for security futures
3) Advertisements and sales literature for registered investment companies that include or use performance rankings or comparisons
4) Initial Advertisements
5) Sales literature regarding b
What are FINRA filings requirements for subsequent advertisements and sales literature
After the initial one-year period, firms may file advertisements and sales literature within 10 days of publication.
When must TV advertisements by filed?
TV advertisements may be filed before use using story board, however final filmed version must be filed with FINRA within 10 business days of first use or broadcast
In the event of a violation of advertisement filing standards...
FINRA may require that the firm file all advertising and sales literature at least 10 business days before use.
What is exempted from FINRA advertisements and sales literature filing requirements?
1) Press Releases for media only
2) advertisements and sales literature that only mentions the exchange symbol for a member firm or a security in which the member is a registered market makrer
3) advertisements and sales literature that only mentions the
Principals of fair dealing
Member may nto disseminate or publish a public communication that it knows or has reason to know is misleading
Requirements for testimonials
1) must clearly indicate that the results achieved by the maker may not have been obtained by anyone else and -
2) that past results are not indicative of future results
3) if more than a nominal sum has been paid for testimonial it must be disclosed
4) i
All advertisements and sales literature must contain?
the name of the member firm or tha alias by which the firm is commonly known
IF a firm portrays a comparison between advertisments or sales literature the firm must describe...
any differences between them (e.g., costs, fluctuation of principal or return, or liquidity)
True or False: Member firms are prohibited from providing payment or compensation to people in order to affect the market price of any security.
TRUE
Which entities are considered institutional investors?
1) a bank
2) S&Ls
3) insurance companies or registered investment companies
4) Investment advisers registered wtih the SEC under section 203 of the Investment Advisers act of 1940
5) any other entity (natural person, corporation, partnership) with total a
Is institutional sales literature filed with FINRA?
No, but it is subject to spot-checking by FINRA. Member firms have written procedures for the internal review of institutional sales literate, but unlike other sales literature approval by a principal is not required prior to use.
Correspondence
Written or electronic messages sent by a member to one or more of its existing retail customers and/or to fewer than 25 prospective retail customers within any 30-day period.
- firms must establish written procedures for the review of correspondence
- reg
Incoming Correspondence
Firms are expected to do a predistribution review of incoming written correspondence.
Procedures are not oultined by FINRA, except that they must be designed to assure adequate handling of customer complaints and funds.
Exceptions are for where this is no
Is approval of correspondence required?
No, approval of corresopndence is not required.
However, a principal of the firm must review prior to use by personnel.
The firm must also creae written procedures that establish the review of institutional sales material by a principal. It must also main
Is approval of insitutional sales material required?
No - but a princpal of the firm m ust review prior to use by personnel
The firm must also creae written procedures that establish the review of institutional sales material by a principal.
The firm must also creae written procedures that establish the rev
Does institutional sales material have to be kept on file?
Yes - along with the name of the person who prepared it.
Has to be kept for three years after the last date of use, along with source materials.
Research Report Definition
Written or electronic communication that conveys an analysis of equity securities of individual companies or industries and provides information reasonably sufficient upon which to base an investment decision.
FINRA rules regarding Report Review
Review and approval of research reports are restricted to personnel within the research department, excluding legal/compliance.
If research needs review by banking or trading, reports must be routed through authorized legal or compliance.
FINRA Small Firm Relationships Exception
Firms that have participated in on average over the last three years 10 or fewer investment banking transactions as a manager or comanager AND produced $5MM or less in gross revenue in those transactions.
Records for this exemption must be kept for three
Subject Company Communications and Exceptions
Broker-dealers may not submit a research report to a subject company prior to its publication.
Exception: sections of a research report may be submitted for factual verification, but may contain a research summary, rating or price target. 1) Prior to subm
When can a firm notify a subject company of a change in rating?
One day prior to the announcement of the change provided notification takes place after the close of trading in the principal market of the subject company's securities
FINRA requirements for Termination of Coverage
3-9
- Firm must provide notice of its decision to its customers
- firm must make available a final research report on the subject company
- Final report must be circulated to clients by similar means as past reports and must parallel prior reports in scop
How long is a firm that acted as a manager or comanger of an IPO restricted from issuing a research report?
40 calendar days following the offering date
How long is a firm that acted as a manager or comanger of a secondary offering restricted from issuing a research report?
10 calendar days following the offering datee
How is the offering date defined for IPOs and secondary offerings?
the later of the effective date of the registration statement or the first day on which the security was offered to the public
What are the exceptions to quiet periods?
1) Transmission of significant news or event on the subject company provided the legal or compliance departement authorizes the research report or any public report made prior to its occurence
2) Actively-traded securities under SEC rule 139 as defined by
What are the restrictions on firms that have acted as an underwriter or dealer during an IPO?
cannot publish or distribute a report or make a public appearance regarding the issuer for 25 calendar days
Research Analyst Compensation
1) must be annually approved by a committee that reports to the members of the board of directors - if the firm doesn't hav ea board of directors committee must report to an executive officer of the firm
2) any analyst who is primarily responsible for the
What factors may be reiviewed in analyst compensation
1) individual performance of the research analyst (productivitiy and quality of research)
2) correlation between the research analyst's recommendations and stock price performance
3) overall ratings received from clients, sales force, and peers
A research analyst may not with regards to trading:
1) purchase or receive pre-IPO shares of an issuer's security that is involved in activities of the same type that the research analyst follows
2) purchase or sell securities of the companies that he follows or any option on or derivative of such securiti
What are the exceptions to research analyst trading rules?
1) analyst can sell securities in his account that are of a company the analyst follows within 30 days after the analyst began following the company for the firm
2) Prior to the publication of a research report a firm may allow an anlyst to purchase any s
Research Analyst Supervisors Trading Restrictions
No restrictions, but must obtain approval for transactions involving equity securities that research analysts they oversee cover
Personell include: DOR, members of a committee, and SAs
Rules for Display of Disclosure Statements
- Must be on the first page or there must be language on the first page stating where disclosures can be found
- Disclosures for reports that cover six or more companies can driect the reader to a place where they can find disclosures, in written or elect
Records for disclosures for Public Appearances
firms must keep records regarding public appearances made by their research analysts that show that the analyst provided the disclosure items
- firm must maintain these records for three years from the date of the public appearance
FINRA Conflict of Intrest Disclosures
- must acknowledge a research analyst or household member's ownership and nature of ownership of securities of a company subject to a research report prepared by the analyst
- firm must reveal whether it or one of its affiliates owns 1% or more of any cla
Compensation disclosures
- must acknowledge if a portion of the research analyst's compensation was based upon investment banking revenues
- must acknowledge if the analyst recieved compensation from the subject company
- acknowledge if in the past 12 months it has been a manger
When are compensation disclosures seen as complete?
if done within 30 days of the last calendar quarter, given that the firm has acted in ways to identify compensation that would fit into this category during the calendar quarter
Employment Disclosure
In a research report and during public appearances a firm and research analyst must disclose whether the analyst or member of his household acts as an officer, director, or advisory board member of the subject company
Ratings Disclosures
Member must disclose the percentages of all securities rated by the member assigned by each ranking. For each rating category the firm must also disclose the percentage of subject companies for which the firm has provided ibank services within the last 12
How long does the price chart have to be for?
for the period that the firm assigned any rating or for a three-year period, whichever is shorter
What guidelines must the price chart meet?
1) Include an indication of the dates on which the firm assigned or changed a rating or price target for the security
2) include a depiction of each rating and price target assigned or changed on those days
3) be up to date as of the end of the most recen
Conflict of interest in IPO distribution?
Conflict of interest exists when the member or associated persons:
1) beneficially own 10% or more of the outstanding subordinated debt of a company
2) beneficially own 10% or more of the preferred equity of a company
3) beneficially own 10% or more of th
When do distribution conflict of interests not apply?
- offering exempt from registration unders the Securitites Act of 1933
- a registered investment company
- a REIT
- a direct participation program
- an offering of ABS that are rate in one of the four highest generic ratings categories
- an offering of eq
Exceptions for which a firm may participate in the underwriting of its own securities?
1) member firm is a coropration, partnership, or sole proprietorship in which the majority of board of directors has been actively engaged in the investment banking business for five years prior to the filing of the registration
2) the member firm does no
Where must proceeds of an offering be placed under rule 2720 prior to a member firm making disclosure to its customers
in escrow
How should a firm disclose it has participated in the offering of its own or its affiliates securities?
- Disclosure must be provided in the registration statement, offering circular, or similar document
- must include the name of the participating qualified independent underwriter
- must notify customers the date at which proceeds will be released from esc
If net capital computation fails to meet SEC requirments and an exemption from the net capital rule has not been obtained, what happens to funds?
all funds must be returned to customers and the offerinc will be canceled
New Issue Rule
A FINRA member should:
- make a bona fide offering of new issues to the public
- not withhold any shares for its own account or its employees accounts
A FINRA member is prohibited from:
- selling a new issue to an account in which a restricted person has
Preconditions for sale (IPOs)
Usually in the form of an affirmative statement from the account holder declaring the account is eligible
For accounts held by banks/conduits - firm must obtain representation that all of its purchasers of new issues are incompliance with the rule
How often muyst a member firm re-verify elegibility for sales?
every 12 months
How long must a member firm retain copies of information used in verification for sales?
3 years
Can a firm use oral statements to verify account elegibility?
No - but electronic statements are permissible
Restricted persons
A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies
1) FINRA member firms and any associated person of the member firm
2) an immediate family member of an employee of a member firm; immediate family membe
New Issue Rule Exemptions
- if the offering is undersubscribed a broker-dealer may purchase (still can't sell to other restricted persons)
- anti-dilution provision assuming buyer owned shares for at least one-year prior
- investment companies
- general or separate account of an i
When is the filing date?
the day the registration statement is recieved by the SEC
S-1
filed by issuers not eligibe for other forms
S-3
available for corporations that have been filing reports with the SEC for twelve months, have securities outstanding with a market value of $75MM or more
20-day cooling off period
period during which the SEC reviews information in the registration
Preliminary Prospectus (Red Herring)
- filed during the cooling off period
- prepared to obain indications of itnerest from customers; it is not binding
- does not contain offering date or final price; may contain a price range
Steps in an offering
1) S-1 or S-3 Filed
2) 20-day cooling off period
3) red herring prepared (during cooling off period)
4) Due dilligence meeting
5) final prospectus (when used for more than 9 months, must contain up to date information)
Rule 134
Communications not deemed a prospectus
- permits a tombstone ad (announces that offering has taken or is taking place)
A statement must be included as to whether the security is being offered by the issuer or a security holder or both and whether the issu
Rule 134a
Limits options advertisements to explanatory information describing the general nature of the standardized options markets or one or more strategies
- potential risks to options trading and to each strategy must be explained
- no past or projected perform
Rule 135
- prohibits any discussion of a new issue prior to the filing date
- a very limited prefiling announcement can be made for public companies to make current shareholders aware
Rule 135a
permits the use of advertising that describes in general ow investment comanies work
if material doesn't mention a specific investment company, it can be used without a prospectus
it may include an invitation for further information
Rule 137
A broker-dealer not involved in the offering can publish a research report as long as no payment has been recieved from a participant in the distribution
a broker-dealer may also distribute research reports for securities that are in the registration proc
Rule 138
if a registration statement has been filed for a nonconvertible debt security or nonconvertable preferred stock, a broker-dealer may, even if it is a participant in the distribution, publish or distribute in the normal course of business a research report
Rule 139
- if an issuer is subject to the 1934 act or is a well-known
seasoned issuer a broker-dealer may publish or distribute a research report regarding the issuer's securities.
- for reports regarding a specific issuer, the report must be distributed by the de
Regulation A
Exemption for small securities if:
1) max of $5MM within a 12 month period
2) no more than $1.5MM may be offered by selling shareholders
3) must make a Form 1-A offering statement (considered qualified with the SEC on the 20th calendar day)
4) a prelimina
Regulation D
exempts registration for private placement of securities by an issuer if:
1) Form D is filed with the SEC no later than 15 days after first sale of securities
2) offerings exceeding $1MM allows an unlimited amount of accredited investors and 35 nonaccredi
Who qualifies as an accredited investor?
1) financial institutions, large tax-exempt plans, and private business development companies
2) any director, executive officer or general partner of the issuer
3) those individuals who either a) have a net worth of $1MM+ or b) have gross income of $200M
Purchaser representative
Under reg d, a person who represents potential purchasers
they:
1) cannot own more than 10% of the stock
2) cannot be an affiliate of the issuer unless they are a close relative of the offeree
3) must be designated by potential purchaser
4) must be knowle
Rule 144
Allows holders of restricted and control stock to sell shares in the secondary market if:
1) files a form 144 unless amount of sale doesn't exceed 5,000 shares AND dollar amount doesn't exceed $50,000
2) stock has been held for at least 6 months
3) sale i
What is the limitation on the amount of stock that may be sold under Rule 144 during a three-month period?
If the stock is listed on an exchange or NASDAQ, the max si the greater of 1% of total shares outstanding or the average weekly volume of the past four weeks
If traded OTC, the limitation is 1% of shares outstanding
Rule 144A
permits sale of restricted stock without conditions of rule 144 if:
1) buyer is a QIB
2) buyer is purchasing for its own account or other QIBs account
3) the buyer must own and invest at least $100MM of securities of issuers not affilated with the buyer
Regulation S
Securities issued offshore are not subject t o the 1933 act provided:
1) the transaction is offshore meaning a) the buyer is outside the US at the time the buy order is originated or b) the transaction is executed through the facilites of a designated off
Section 9
an analyst may not accept payment to attempt to persuade the public or any other person to purchase an exchange listed security by circulating information that the price of the security will rise or fall beacause of the actions of another person
Rule 10b-1 and Rule 10b-3
prohibits the use and employment of manipulative and deceptive deveces regarding listed securities and securities exempt from the exchange act
10b-5
prohibits any activity that a person or broker-dealer may use to manipulate the securities markets. Specifically:
- any device, scheme, or artifice to defraud
- untruthful statements of material fact or the ommission of material facts that would make stat
Rule 17a-3
broker-dealers required to create specific records
Exception: if trades are cleared through a bank and the bank keeps records
Obligation rests with the clearing firm
rule 17 a-4
specificies amounts of time records must be kept after their creation
Regulation AC
Research analysts must certify if:
1) the research report accurately describes his personal views about the subjec issuer's securities
2) his compensation will be related to recommendations or views expressed in the report
Regulation G
Non-GAAP financials must have disclosures with:
1) the most directly comparable financial measure calculated and presented in accordance with GAAP
2) a reconciliation for the non-GAAP masures that is forward-looking
Exceptions to Reg G
Does not pertain to foreign issuers whose:
1) securities are listed or quoted on an exchange or quotation system outside of the US
2) non-GAAP measure is not based on a measure calculated and presented under GAAP in teh US
3) Non-GAAP disclosure is made o
Regulation M
underwriters are restricted from bidding for stock that is being offered in a distribution for a certain period of time around the effective date.
What is the length of the Regulation M restricted period?
generally begins five business days prior to pricing and ends when the broker-dealer's participation ends
if the subject secutity as an average daily trading volume of at least $100,000 and the issuer's public float is $25MM or more, the five business day
Regulation FD
bars issuers from selective disclosure of material nonpublic info
8-King the info allows the company to fulfuill disclosure requirements